Adjusted diluted earnings per share1 was $3.11 in the quarter; $12.14 for 2017

Cash from operations was $814 million and free cash flow1 was $453 million in 2017

NEWPORT NEWS, Va., Feb. 15, 2018 (GLOBE NEWSWIRE) — Huntington Ingalls Industries (NYSE:HII) reported fourth quarter 2017 revenues of $2.0 billion, up 3.9 percent from the fourth quarter of 2016. Operating income in the quarter was $227 million and operating margin was 11.4 percent, compared to $268 million and 13.9 percent, respectively, in the fourth quarter of 2016. Diluted earnings per share in the quarter was $1.41, compared to $4.20 in the same period of 2016. Diluted earnings per share in fourth quarter 2017 included a one-time expense related to the early extinguishment of debt, the tax expense for the revaluation of net deferred tax assets resulting from the enactment of the Tax Act and the tax expense associated with a $214 million acceleration of discretionary pension contributions in 2018. Excluding these items, adjusted diluted earnings per share1 in the quarter was $3.11.

For the full year, revenues of $7.4 billion increased 5.3 percent over 2016. Operating income in 2017 was $865 million and operating margin was 11.6 percent, compared to $858 million and 12.1 percent, respectively, in 2016. Diluted earnings per share for the full year was $10.46, compared to $12.14 in 2016. Excluding the one time items described in the preceding paragraph, adjusted diluted earnings per share1 for 2017 was $12.14.

Cash from operations in 2017 was $814 million and free cash flow1 was $453 million, compared to $822 million and $537 million, respectively, in 2016.

New contract awards for 2017 were approximately $8.1 billion, bringing total backlog to $21.4 billion as of Dec. 31, 2017. Major contract awards in 2017 included Bougainville (LHA 8) construction, the refueling and complex overhaul (RCOH) of the aircraft carrier USS George Washington (CVN 73), a contract to begin integrated product and process development for the U.S. Navy’s new Columbia-class submarines, USS Boise (SSN 764) overhaul, LPD 29 (unnamed) advanced procurement, special selected restricted availability on USS Chosin (CG 65), and Jack H. Lucas (DDG 125) Flight III upgrades.

2 Non-GAAP measures. See Exhibit B for definitions and reconciliations.

Segment Operating Results

Ingalls Shipbuilding

Three Months Ended

Year Ended

December 31

December 31

($ in millions)

2017

2016

$Change

%Change

2017

2016

$Change

%Change

Revenues

$

638

$

641

$

(3

)

(0.5

)%

$

2,420

$

2,389

$

31

1.3

%

Segment operating income (loss)1

75

85

(10

)

(11.8

)%

313

321

(8

)

(2.5

)%

Segment operating margin %1

11.8

%

13.3

%

(151) bps

12.9

%

13.4

%

(50) bps

1 Non-GAAP measures. See Exhibit B for definitions and reconciliations.

Ingalls Shipbuilding revenues for the fourth quarter were $638 million, a decrease of $3 million, or 0.5 percent, from the same period in 2016, due to lower revenues in the Legend-class National Security Cutter (NSC) program and surface combatants, partially offset by higher revenues in amphibious assault ships. Lower NSC program revenues were primarily due to decreased volumes on the delivered USCGC Munro (NSC 6) and Kimball (NSC 7), partially offset by increased volumes on Stone (NSC 9) and Midgett (NSC 8) in the quarter. Lower surface combatant revenues were primarily due to decreased volumes on the delivered Ralph Johnson (DDG 114), the delivered USS John Finn (DDG 113) and Lenah H. Sutcliffe Higbee (DDG 123), partially offset by increased volume on Jack H. Lucas (DDG 125). Higher amphibious assault ship revenues were due to increased volumes on Bougainville (LHA 8), Fort Lauderdale (LPD 28) and LPD 29 (unnamed), partially offset by decreased volume on the delivered USS Portland (LPD 27).

Ingalls Shipbuilding segment operating income for the fourth quarter was $75 million, a decrease of $10 million from the same period last year. Segment operating margin in the quarter was 11.8 percent, compared to 13.3 percent in the same period last year. These decreases were primarily due to lower risk retirement on the NSC and DDG programs, partially offset by higher risk retirement on the LPD program.

For the full year, Ingalls Shipbuilding revenues were $2.4 billion, an increase of $31 million, or 1.3 percent, from the same period in 2016, due to higher revenues in amphibious assault ships, partially offset by lower revenues in surface combatants and the Legend-class NSC program. Higher amphibious assault ship revenues were primarily due to increased volumes on Bougainville and Fort Lauderdale, partially offset by decreased volumes on the delivered USS John P. Murtha (LPD 26) and USS Portland. Lower surface combatant revenues were primarily due to decreased volumes on the delivered USS John Finn, Ralph Johnson, Frank E. Peterson Jr. (DDG 121), Paul Ignatius (DDG 117) and Delbert D. Black (DDG 119), partially offset by higher volumes on Jack H. Lucas and Lenah H. Sutcliffe Higbee and the extended selected restricted availability contract for USS Ramage (DDG 61). Revenues on the Legend-class NSC program decreased due to lower volume on the delivered USCGC Munro, partially offset by higher volumes on Stone and Midgett.

For the full year, Ingalls Shipbuilding segment operating income was $313 million, compared to $321 million in 2016. Segment operating margin was 12.9 percent for 2017, compared to 13.4 percent in 2016. These decreases were primarily due to lower risk retirement on the delivered USS John P. Murtha and surface combatants, partially offset by higher risk retirement on Tripoli (LHA 7) and the delivered USS Portland.

1 Non-GAAP measures. See Exhibit B for definitions and reconciliations.

Newport News Shipbuilding revenues for the fourth quarter were $1.1 billion, an increase of $20 million, or 1.8 percent, from the same period in 2016, due to higher revenues in naval nuclear support services and aircraft carriers, partially offset by lower revenues in submarines. Higher naval nuclear support services revenues were primarily due to increased volumes in submarine support services, partially offset by lower volume in aircraft carrier support services. Higher aircraft carrier revenues were primarily due to increased volumes on the advance planning and execution contract for the RCOH of USS George Washington (CVN 73), the advance planning contract for Enterprise (CVN 80) and the construction contract for John F. Kennedy (CVN 79), partially offset by decreased volumes on the execution contract for the RCOH of USS Abraham Lincoln (CVN 72), the construction contract for the delivered USS Gerald R. Ford (CVN 78) and the inactivation of the decommissioned Enterprise (CVN 65). Lower submarines revenues related to the Virginia-class (SSN 774) submarine (VCS) program were due to decreased volumes on Block III boats.

Newport News Shipbuilding segment operating income for the fourth quarter was $106 million, a decrease of $33 million from the same period last year. Segment operating margin was 9.3 percent for the quarter, compared to 12.4 percent in the same period last year. These decreases were primarily due to favorable changes in overhead costs in fourth quarter 2016 and the receipt of a $15 million local government incentive grant in fourth quarter 2016, partially offset by higher risk retirement on the aircraft carrier RCOH program in fourth quarter 2017.

For the full year, Newport News Shipbuilding revenues were $4.2 billion, an increase of $75 million, or 1.8 percent, from 2016, due to higher revenues in aircraft carriers and naval nuclear support services, partially offset by lower revenues in submarines. Higher aircraft carrier revenues were primarily due to increased volumes on the advance planning and execution contract for the RCOH of USS George Washington, the construction contract for John F. Kennedy and the advance planning contract for Enterprise (CVN 80), partially offset by decreased volumes on the execution contract for the RCOH of USS Abraham Lincoln, the construction contract for the delivered Gerald R. Ford and the inactivation of the decommissioned Enterprise (CVN 65). Higher naval nuclear support services revenues were primarily due to increased volume in submarine support services and facility maintenance services, partially offset by decreased volume in aircraft carrier support services. Lower submarines revenues related to the VCS program were due to decreased volumes on Block III boats, partially offset by increased volumes on Block IV boats.

For the full year, Newport News Shipbuilding segment operating income was $354 million, a decrease of $32 million from 2016. The decrease was primarily due to favorable changes in overhead costs in fourth quarter 2016, the receipt of a $15 million local government incentive grant in fourth quarter 2016, and lower volume and risk retirement in the VCS program. These decreases were partially offset by the resolution of outstanding contract changes on the inactivation of the decommissioned Enterprise and the RCOH of USS Abraham Lincoln. Segment operating margin for 2017 was 8.5 percent, compared to 9.4 percent in 2016.

Key Newport News Shipbuilding milestones for the quarter:

Awarded a $60 million contract to overhaul USS Boise (SSN 764), which includes options that, if exercised, would bring the total value of the contract to $385 million

Awarded a contract from General Dynamics Electric Boat worth up to $468 million to begin integrated product and process development for the U.S. Navy’s new Columbia-class submarines

Technical Solutions

Three Months Ended

Year Ended

December 31

December 31

($ in millions)

2017

2016

$Change

%Change

2017

2016

%Change

%Change

Revenues

$

242

$

186

$

56

30.1

%

$

952

$

691

261

37.8

%

Segment operating income (loss)1

8

1

$

7

700.0

%

21

8

13

162.5

%

Segment operating margin %1

3.3

%

0.5

%

277 bps

2.2

%

1.2

%

105 bps

1 Non-GAAP measures. See Exhibit B for definitions and reconciliations.

Technical Solutions revenues for the fourth quarter were $242 million, an increase of $56 million, or 30.1 percent, from the same period in 2016, primarily due to higher revenues in integrated missions solutions services and fleet support. Higher revenues in integrated missions solutions services were due to the acquisition of Camber in December 2016.

Technical Solutions segment operating income for the fourth quarter was $8 million, compared to $1 million in fourth quarter 2016, driven primarily by improved performance in nuclear and environmental services and increased volume in integrated missions solutions services, due to the acquisition of Camber in December 2016.

For the full year, Technical Solutions revenues were $952 million, an increase of $261 million, or 37.8 percent, from 2016, primarily due to higher volumes in integrated missions solutions services following the December 2016 acquisition of Camber, and higher volumes in fleet support and oil and gas services, partially offset by lower volumes in nuclear and environmental services due to the resolution in 2016 of outstanding contract changes on a nuclear and environmental commercial contract.

For the full year, Technical Solutions segment operating income was $21 million, compared to $8 million in 2016. This increase was primarily due to improved performance in oil and gas services and higher volume in integrated missions solutions services following the December 2016 acquisition of Camber, partially offset by the establishment of an allowance for accounts receivable on a nuclear and environmental commercial contract in 2017 and the resolution in 2016 of outstanding contract changes on a nuclear and environmental commercial contract.

Key Technical Solutions milestones for the quarter:

Awarded a U.S. Department of Energy contract for the Los Alamos Legacy Cleanup, as part of Newport News Nuclear BWXT Los Alamos, LLC (N3B), a joint venture led by Stoller Newport News Nuclear (SN3), with partner BWX Technologies, Inc.

About Huntington Ingalls Industries

Huntington Ingalls Industries is America’s largest military shipbuilding company and a provider of professional services to partners in government and industry. For more than a century, HII’s Newport News and Ingalls shipbuilding divisions in Virginia and Mississippi have built more ships in more ship classes than any other U.S. naval shipbuilder. HII’s Technical Solutions division provides a wide range of professional services through its Fleet Support, Integrated Missions Solutions, Nuclear and Environmental, and Oil and Gas operations. Headquartered in Newport News, Virginia, HII employs nearly 38,000 people operating both domestically and internationally. For more information, please visit www.huntingtoningalls.com.

Conference Call Information

Huntington Ingalls Industries will webcast its earnings conference call at 9 a.m. ET today. A live audio broadcast of the conference call and supplemental presentation will be available on the investor relations page of the company’s website: www.huntingtoningalls.com. A telephone replay of the conference call will be available from 12 noon today through Thursday, Feb. 22 by calling toll-free (855) 859-2056 or (404) 537-3406 and using conference ID 1284447.

Forward-Looking Statements

Statements in this release, other than statements of historical fact, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Factors that may cause such differences include: changes in government and customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans); our ability to estimate our future contract costs and perform our contracts effectively; changes in procurement processes and government regulations and our ability to comply with such requirements; our ability to deliver our products and services at an affordable life cycle cost and compete within our markets; natural and environmental disasters and political instability; our ability to execute our strategic plan, including with respect to share repurchases, dividends, capital expenditures and strategic acquisitions; adverse economic conditions in the United States and globally; changes in key estimates and assumptions regarding our pension and retiree health care costs; security threats, including cyber security threats, and related disruptions; and other risk factors discussed in our filings with the U.S. Securities and Exchange Commission. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligation to update any forward-looking statements. You should not place undue reliance on any forward-looking statements that we may make. This release also contains non-GAAP financial measures and includes a GAAP reconciliation of these financial measures. Non-GAAP financial measures should not be construed as being more important than comparable GAAP measures.

Accounts receivable, net of allowance for doubtful accounts of $15 million as of 2017 and $4 million as of 2016

1,188

1,164

Inventoried costs, net

183

210

Prepaid expenses and other current assets

123

48

Total current assets

2,195

2,142

Property, plant, and equipment, net of accumulated depreciation of $1,770 million as of 2017 and $1,627 million as of 2016

2,215

1,986

Other Assets

Goodwill

1,217

1,234

Other intangible assets, net of accumulated amortization of $528 million as of 2017 and $488 million as of 2016

508

548

Long-term deferred tax assets

114

314

Miscellaneous other assets

125

128

Total other assets

1,964

2,224

Total assets

$

6,374

$

6,352

Liabilities and Stockholders’ Equity

Current Liabilities

Trade accounts payable

$

375

$

316

Accrued employees’ compensation

245

241

Current portion of postretirement plan liabilities

139

147

Current portion of workers’ compensation liabilities

250

217

Advance payments and billings in excess of revenues

146

166

Other current liabilities

236

256

Total current liabilities

1,391

1,343

Long-term debt

1,279

1,278

Pension plan liabilities

922

1,116

Other postretirement plan liabilities

414

431

Workers’ compensation liabilities

509

441

Other long-term liabilities

101

90

Total liabilities

4,616

4,699

Commitments and Contingencies

Stockholders’ Equity

Common stock, $0.01 par value; 150 million shares authorized; 53.0 million shares issued and 45.1 million shares outstanding as of December 31, 2017, and 52.6 million shares issued and 46.2 million shares outstanding as of December 31, 2016

We internally manage our operations by reference to “segment operating income (loss)” and “segment operating margin,” which are not recognized measures under GAAP. When analyzing our operating performance, investors should use segment operating income (loss) and segment operating margin in addition to, and not as alternatives for, operating income and operating margin or any other performance measure presented in accordance with GAAP. They are measures that we use to evaluate our core operating performance. We believe that segment operating income (loss) and segment operating margin reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. We believe these measures are used by investors and are a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income (loss) and segment operating margin may not be comparable to similarly titled measures of other companies.

Adjusted net earnings (loss) and adjusted diluted earnings per share are not measures recognized under GAAP. They should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. We believe these measures are useful to investors because they exclude items that do not reflect our core operating performance. They may not be comparable to similarly titled measures of other companies.

Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. We believe free cash flow is an important measure for our investors because it provides them insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies.

Segment operating income (loss) is defined as operating income (loss) for the relevant segment(s) before the FAS/CAS Adjustment and non-current state income taxes.

Segment operating margin is defined as segment operating income (loss) as a percentage of sales and service revenues.

Adjusted net earnings (loss) is defined as net earnings (loss) adjusted for the after-tax impact of the loss on early extinguishment of debt in fourth quarter 2017 and for tax reform.

Adjusted diluted earnings per share is defined as adjusted net earnings (loss) divided by the weighted-average diluted common shares outstanding.

FAS/CAS Adjustment is defined as the difference between our pension and postretirement plan expense under GAAP Financial Accounting Standards and the same expense under U.S. Cost Accounting Standards (CAS). Our pension and postretirement plan expense is charged to our contracts under CAS and included in segment operating income.

Non-current state income taxes are defined as deferred state income taxes, which reflect the change in deferred state tax assets and liabilities and the tax expense or benefit associated with changes in state uncertain tax positions in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.

We present financial measures adjusted for the FAS/CAS Adjustment and non-current state income taxes to reflect the company’s performance based upon the pension costs and state tax expense charged to our contracts under CAS. We use these adjusted measures as internal measures of operating performance and for performance-based compensation decisions.

Reconciliation of Segment Operating Income (Loss) and Segment Operating Margin

Three Months Ended

Year Ended

December 31

December 31

($ in millions)

2017

2016

2017

2016

Ingalls revenues

$

638

$

641

$

2,420

$

2,389

Newport News revenues

1,139

1,119

4,164

4,089

Technical Solutions revenues

242

186

952

691

Intersegment eliminations

(23

)

(24

)

(95

)

(101

)

Sales and Service Revenues

1,996

1,922

7,441

7,068

Segment Operating Income (Loss)

Ingalls

75

85

313

321

As a percentage of Ingalls revenues

11.8

%

13.3

%

12.9

%

13.4

%

Newport News

106

139

354

386

As a percentage of Newport News revenues

9.3

%

12.4

%

8.5

%

9.4

%

Technical Solutions

8

1

21

8

As a percentage of Technical Solutions revenues

3.3

%

0.5

%

2.2

%

1.2

%

Segment Operating Income (Loss)

189

225

688

715

As a percentage of Sales and Service revenues

9.5

%

11.7

%

9.2

%

10.1

%

Non-segment factors affecting operating income (loss):

FAS/CAS Adjustment

45

38

189

145

Non-current state income taxes

(7

)

5

(12

)

(2

)

Operating Income

227

268

865

858

Interest expense

(41

)

(18

)

(94

)

(74

)

Other, net

1

1

1

—

Federal and foreign income taxes

(123

)

(54

)

(293

)

(211

)

Net Earnings

$

64

$

197

$

479

$

573

Reconciliation of Adjusted Net Earnings

Three Months Ended

Year Ended

December 31

December 31

(in millions)

2017

2016

2017

2016

Adjusted Net Earnings (Loss)

Net earnings (loss)

$

64

$

197

$

479

$

573

After-tax adjustment for loss on early extinguishment of debt1

14

—

14

—

Tax reform adjustments:

Tax expense related to 2017 Tax Act2

56

—

56

—

Tax expense related to discretionary pension contributions3

7

—

7

—

Adjusted Net Earnings (Loss)

$

141

$

197

$

556

$

573

Reconciliation of Adjusted Diluted Earnings per Share

Three Months Ended

Year Ended

December 31

December 31

2017

2016

2017

2016

Adjusted Diluted EPS

Diluted earnings (loss) per share

$

1.41

$

4.20

$

10.46

$

12.14

After-tax adjustment for loss on early extinguishment of debt per share1

0.31

—

0.31

—

Tax reform adjustments:

Tax expense related to 2017 Tax Act per share2

1.23

—

1.22

—

Tax expense related to discretionary pension contributions per share3

0.16

—

0.15

—

Adjusted Diluted EPS

$

3.11

$

4.20

$

12.14

$

12.14

Footnotes to the Reconciliation of Adjusted Net Earnings and Adjusted Diluted Earnings per Share

Three Months Ended

Year Ended

December 31

December 31

2017

2016

2017

2016

(1) Loss on early extinguishment of debt

$

22

$

—

$

22

$

—

Tax effect at 35% statutory rate*

8

—

8

—

After-tax effect

14

—

14

—

Weighted-Average Diluted Shares Outstanding

45.4

46.9

45.8

47.2

Per share impact**

$

0.31

$

—

$

0.31

$

—

(2) Tax expense related to 2017 Tax Act a

$

56

$

—

$

56

$

—

Weighted-Average Diluted Shares Outstanding

45.4

46.9

45.8

47.2

Per share impact**

$

1.23

$

—

$

1.22

$

—

(3) Tax expense related to discretionary pension contributions b

$

7

$

—

$

7

$

—

Weighted-Average Diluted Shares Outstanding

45.4

46.9

45.8

47.2

Per share impact**

$

0.16

$

—

$

0.15

$

—

*The income tax impact is calculated using the tax rate in effect for the relevant non-GAAP adjustment.

**Amounts may not recalculate exactly due to rounding.

a Reflects the impact of the net deferred tax assets write down

b Reflects the additional income tax expense from the lower manufacturing deductions available as a result of our planned $214 million increased pre-tax discretionary pension contribution in 2018